China has been promoting wider use of the yuan in international investment and trade settlement to reduce the U.S. dollar’s global dominance and curb its own reliance on the currency of the world’s biggest economy. Photographer: Nelson Ching/Bloomberg

Bloomberg News

China’s Economy Will Bottom Out This Quarter

China’s economy will bottom out this quarter and rebound in the following three months as government measures to stabilize a slowdown take effect, an academic adviser to the nation’s central bank said.

“The second quarter should be the lowest point” this year, Chen Yulu said in an interview at a forum in Beijing on June 16. Full-year growth “should be able to hold up above 8 percent,” he said.

Policy makers in the world’s second-biggest economy are shoring up expansion as Europe’s deepening debt crisis curtails exports and foreign investment, and property curbs at home damp demand. As leaders of the Group of 20 nations meet in Mexico today, President Hu Jintao said he was confident China would maintain steady expansion and contribute to the global recovery.

“Facing a complex and grave external economic environment, China has taken targeted measures to strengthen and improve macroeconomic regulation, accelerate the shift of the growth model, adjust economic structure and build long-term mechanisms to boost domestic demand,” Hu said in a written interview with the Mexican newspaper Reforma, the official Xinhua news agency reported yesterday. “We are confident that China will maintain steady and robust growth and thus make solid contribution to global economic growth.”

China on June 7 announced the first cut in interest rates in more than three years to spur lending amid a slowdown that Chen said exceeded expectations. The government has lowered bank reserve requirements, speeded up approvals for investment projects and announced incentives to boost home-appliance sales.

Deepening Slowdown

China’s growth slid to 8.1 percent in the first three months of the year from a year earlier, the fifth quarterly deceleration. Bank of America Corp. says the decline may deepen to 7 percent to 7.5 percent in the three months through June.

Credit Suisse Group AG has reduced China’s growth estimate for this year to 7.7 percent, which would be the slowest pace in 13 years. Deutsche Bank AG lowered its forecast to 7.9 percent. The predictions compare with a 9.2 percent expansion last year.

Chen, who sits on the monetary policy committee of the People’s Bank of China, is also president of Renmin University in Beijing. He is the editor in chief of a report on the internationalization of the yuan which was distributed by the university’s International Monetary Institute at the June 16 forum.

China has been promoting wider use of the yuan in international investment and trade settlement to reduce the U.S. dollar’s global dominance and curb its own reliance on the currency of the world’s biggest economy.

Fragile Markets

Its efforts to make the yuan a global currency may be hampered by the lack of an independent monetary policy, fragile domestic financial markets and an “unbalanced” economy, according to the report.

The PBOC isn’t independent, with financial decisions such as changes in the exchange rate and interest rates made by leaders of the ruling Communist Party.

“In the process of yuan internationalization, it will be hard to gain the confidence of the international community in the value of the yuan if monetary policy lacks sufficient independence,” the authors wrote, citing as an example the “excessively rigid” exchange-rate system.

A “more open and transparent” system where the yuan is valued against a basket of currencies would send a “clear, convincing” signal that the yuan isn’t pegged to a single currency and that fluctuations are a result of many factors including market demand and supply, according to the report.

Slowdown Pressure

The yuan, which rose 4.7 percent against the U.S. dollar last year, has dropped 1.1 percent this year. The U.S. contends China is keeping its currency artificially weak to boost exports.

China could let the yuan decline to avoid further slowdown pressure in a scenario where Europe’s sovereign debt crisis led to a “sharp” fall in the euro, Robert Mundell, a Nobel Prize- winning economist credited as the intellectual father of the euro, said at the forum.

A drop in the euro to below $1.18 would be “a good time” to let the yuan depreciate “because if the dollar is going up rapidly and if China goes up with it, it would bring a new kind of slowdown to China,” said Mundell, 79, a professor at Columbia University.

China may make the yuan convertible on the capital account by 2020, the institute estimates, basing the projection on the experiences of Japan, Germany and other advanced economies in opening their capital accounts. The yuan could become an international reserve currency within 20 to 30 years, it says.

Loosening Controls

While China’s leaders haven’t publicly given a timetable for convertibility, which would allow capital to flow freely for investment purposes such as securities transactions, officials told European Union business executives “full convertibility” will happen by 2015, EU Chamber of Commerce in China President Davide Cucino said in September.

Policy makers pledged in a five-year plan running through 2015 to keep loosening controls on currency flows and make the exchange rate more flexible.

The central bank in April widened the yuan’s daily trading band against the dollar for the first time since 2007, allowing it to fluctuate up to 1 percent either side of a daily reference rate from a previous 0.5 percent. The same month, the government said it would more than double the amount of funds foreign investors can invest in domestic stocks, bonds and bank deposits.

China will need to retain limits on the yuan even after capital-account convertibility is achieved in order to prevent destabilizing capital flows, according to the institute’s report. “If no strict controls are imposed on speculative hot money, monetary and fiscal policies won’t be effective and the safety of the nation’s financial markets and the real economy could be seriously jeopardized,” it said.

To contact Bloomberg News staff for this story: Bloomberg News in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

After 34 years of continued (never a recession as defined under Western economics) growth, Western economists cannot even explain how the Chicoms did it after the fact. They are still scratching their heads TODAY, predicting the demise of the Chinese economy.